Raghuram Rajan‘s arrival in the Governor’s office at the Reserve Bank of India on Wednesday coincides with the worst economic crisis his country has faced since the early 1990s (see this earlier blog). The rupee hit new lows in the foreign exchange markets last week, and there are signs that a gradual erosion of confidence in the currency is turning into a complete rout. The restoration of confidence in the currency is now the sine qua non for any recovery in the economy more generally.
Like 2013′s other new central bankers (Governor Kuroda in Japan, and Governor Carney in the UK), Mr Rajan now has the advantages of the new broom, providing him a brief opportunity to seize the initiative and change market perceptions about macro-economic discipline in India. But he does not, by any means, hold all of the cards in his own hand. The Fed’s likely tapering of its asset purchases in September has clearly been the catalyst for the acute phase of the crisis. And the seeds of today’s problems have been sown over many years in which an excessive budget deficit has been partly monetised by the RBI, feeding a credit bubble, and a burgeoning current account deficit. Read more